Looking The Bull Market In The Mouth

This article “Looking The Bull Market In The Mouth” by Goh Eng Yeow was first published in The Straits Times on 19 Nov 2017 and is reproduced in this blog in its entirety.

Far from nearing its end, bull run may have just begun, if 10-year timeframe is considered

A year is a very long time in the stock market, as many investors know all too well, given what was happening around this time last year.

Anyone in or around markets across the globe had one thing on their minds: how to adjust to real estate tycoon turned reality TV star Donald Trump’s unexpected victory in the United States presidential election.

Despite an initial knee-jerk sell-down, stock markets around the globe went on to put up an impressive performance on hopes that the populist policies he championed would stimulate economic growth in the US and have a positive spillover effect on the rest of the world.

Even so, it would be difficult to find any market strategist anticipating the Trump victory to provide anything other than a short-term fillip for the stock market.

As former DBS Bank chief investment officer Lim Say Boon noted after stock prices had risen for two weeks following the election, the “Trump trades” seemed to be overdone, given the likelihood of a US interest rate hike, tepid job numbers and a sluggish economic outlook.

He was not the only doubter. Last December, few research houses were tipping shares to enjoy further upside in a big way.

Even bullish ones such as CIMB Research were expecting the benchmark Straits Times Index (STI) to enjoy a 7 per cent gain to 3,140, while more conservative ones like UOB Kay Hian noted that the STI appeared to be “marginally over-valued, trading at 2016’s price-earnings of 16.7 times”.

What actually panned out has been one of STI’s best performances in recent years, with the marketbarometer making an astonishing gain of almost 20 per cent in the past 12 months – a feat few investors could have imagined possible even a few months ago.

As the market enters the final trading phase of the year, what does the future hold for stock prices?

Not surprisingly, research houses have been falling over themselves anticipating further gains for the share market.

UOB Kay Hian, for example, noted that corporate earnings have turned around this year and could be expected to continue rising next year. It has a 2018 year-end target of 3,530 points for the STI, but “this could stretch to 3,730 if earnings surprised on the upside”.

This would give the STI an upside of as much as 11 per cent from its current level of around 3,352.

The research house is expecting corporate earnings per share to grow by 6.4 per cent next year, boosted by an improved showing from sectors such as banks, telecommunications, manufacturing and shipyards.

Like many other market pundits, I have been sceptical about the market’s ability to rally further.

Indeed, one of the things I have found myself doing in the past few months is trying to make a case against the ongoing bull market.

And there have been some worrying trends worth highlighting, like the low market volatility, which suggests that investors are too complacent about the risks they are taking as they pour money at this late stage into the surging bourse.

Yet while it may be easy for us to conclude that we are reaching the top of the bull market, you could also argue that the decade-long bear market we have been enduring is only now coming to an end.

Why do I say that? Even with the upswing in stock prices, major regional indexes such as the STI and Hang Seng are only just clawing their way back to the highs reached a decade ago.

Take the STI in December 1999, when the world was intoxicated with the dot.com craze. It reached a then record high of 2,582.94 on Jan 3, 2000.

That record stood for nearly six years as the local market was spooked by the dot.com bust and the Sars crisis.

It started to pick up again in April 2006, and there was no looking back as the STI whizzed past the 3,000-point level the following January and hit a record high of 3,875 in October 2007, before the sub-prime crisis in the US sparked a terrifying financial firestorm that triggered a series of bank failures across the globe.

So, measured over a 10-year timeframe, you can just as convincingly argue that far from nearing its end, the bull market has only just started, if we measure it from when it starts to overtake the previous record high.

Not only that. The global economy is on a tear, experiencing growth at a rate not seen in over a decade. This is likely to boost Singapore’s growth closer to 3 per cent for this year.

This explains why instead of looking at the glass half-empty, it may be worthwhile examining why it might actually be half-full. Stocks rarely languish in a bearhug when the economic outlook is rosy.

What is also interesting to note is the various arguments put forward by market experts to explain the longevity of this bull run.

Mr Steve Einhorn, a former research head at US investment bank Goldman Sachs, for example, asserted that the rally still has legs because the economic cycle is really different this time.

In a Goldman report carried by the London-based Daily Telegraph, he observed that the US economic upswing – now 101 months long – is already way longer than the 60 months’ average upturn in the post-World War II era.

At the end of an economic upcycle, key indicators would usually warn of problems in the months leading to a recession, but today, they are pointing in the opposite direction.